Hiring your company’s first employee is a major milestone for many small businesses; considered by the businessman as a sign of growth and prosperity. Usually the unexpected is a harbinger of countless frustrating hours spent working payroll and calculating your payroll tax liability.

Who pays the employment taxes, me or my employee?

Payroll obligations and taxes come in two different varieties: those that your employee pays but you are responsible for withholding, and those that you pay and are responsible for withholding. The key here is that no matter what, you as an employer are responsible for the proper collection and filing of employment taxes and that responsibility is a serious one. Payroll taxes can’t be discharged in bankruptcy and your Uncle Sam is the last bill collector you want to cross. So be very careful learning your responsibilities and making sure they are fully followed!

What payroll taxes am I responsible for?

• federal participation it is for most of us the largest single deduction from our paycheck. Through a Form W-4, the employee informs the employer how much he should have withheld from each paycheck. It is the employer’s responsibility to use the W-4 to calculate how much should be deducted from the employee’s paycheck and remitted to the federal government.
• FICA It represents Federal Insurance Contributions Law tax and basically means Social Security and Medicare. The theory behind these taxes is that they are shared half and half by the employer and the employee; 6.2% of wages for social security and 1.45% for Medicare. In addition, wages subject to Social Security (but not Medicare) taxes are limited by a Social Security wage base that is $106,800 for 2010 but is adjusted annually for inflation. This means that the maximum annual amount for Social Security in 2010 is $6,621.10 each for the employer and employee.
• FUTA It represents Federal Unemployment Tax Law and is a tax paid by the employer; typically 8% of the first $7,000 of income.
• State and Local Taxes, as the name implies, vary greatly from state to state. Generally, each state will charge YOUR TAor state unemployment, and order a state tax withholding.

Who do I have to pay employment taxes to?

Payroll is a pain in the ass. It’s complicated, time consuming, creates potentially devastating liability, and causes cash flow problems for the business. So why not avoid it? In the past it has been fashionable to characterize the people who work for you as independent contractors, pay them in cash, and simply issue a 1099-MISC at the end of the year. Not only have you freed up a ton of valuable time that can be used productively (for example, a three-martini lunch), but you’ve also saved yourself the FUTA and FICA taxes you’d normally be responsible for. The employee, uh, the independent contractor is happy too, because he gets to take home the entire check without all those pesky taxes and withholdings on his paycheck. Win-win, right? Well, guess again, Buckaroo. The IRS has been up to that trick for a long time and has lately launched a campaign against employers, er, contractors, who fail to properly classify the people they hire.

Who is an independent contractor?

There are no clear lines or safe harbors to determine when it is safe to consider a worker as an independent contractor or employee, but ethos has to do with control over the worker’s time and services. Do you tell the worker when and where to be? Do you demand exclusivity of his services or make them work certain hours to make it difficult for someone else to work? Have you been paying them a constant amount, at constant intervals, over a long period of time? All are factors that, in the eyes of the IRS, may mean that your worker is actually an employee masquerading as an independent contractor.

All of this is not to say that you should immediately make that independent contractor an employee, but you should know where the IRS stands on the matter and be aware of the potential consequences if you are audited.

What compensation is subject to employment tax?

Employee compensation can come in many forms and go by many different names. Whether you call it wages, salary, commissions, bonuses, or anything else, it really is irrelevant to the determination of employment taxes due; The general rule is that if someone is being compensated for their time or efforts, then they are probably subject to employment tax. Some specific exceptions established by law include: vacation pay, expense reimbursement, employee benefits, and prizes or gifts.

How often do I make payments?

This completely depends on how big your business is and how many employees are on your payroll. Very small businesses with only one employee could possibly be required to pay quarterly, but most employers pay bi-weekly or monthly. Publication 15 (download on the IRS website) is your guide to all things employee-related and can help you determine how often you’ll need to send payments to the IRS.

How do I get help?

If all this makes your eyes roll and your palms sweat, don’t despair, many business owners choose to outsource the heavy lifting that is payroll to specialists so they can focus on what’s really important, running a business. successful. There are three main options, depending on your willingness to pay and the complexity of your payroll.

• Using special software like Quickbooks Payroll – no, the software can’t actually do the work for you, but you can save a lot of time and hassle by automating the process. The best packages also provide support so that you have a recourse when the inevitable strange transaction arises.
• Hire an accounting firm – Most accounting firms (like me!) that specialize in working with employers will also have a payroll outsourcing feature that can take most of the dirty work out of your hands. They tend to specialize in small and medium-sized companies with less than 100 employees.
• Hiring a payroll outsourcing company – Paychex is the big dog on this block with almost 40 years of experience in handling payroll for medium and large companies. Usually the most expensive option available and often the most comprehensive.